Jonathan Tetsell ACA explains the McCloud remedy and what it potentially means for NHS and public sector workers’ pensions.
In 2015 the government introduced reforms to most public sector pension schemes. The changes amounted to a shift from ‘Final Salary’ basis to a ‘Career Average Earnings’ basis.
For those scheme members who were close to retirement, and also met some other criteria, they were protected in the final salary basis schemes. This meant they didn’t need to shift to the new career average earnings scheme at the time.
Subsequently a court of appeal ruled that these protections they were enjoying were in fact discriminatory against younger members of the scheme. The McCloud Remedy was then put in place to make things fair and level up the playing field.
In this blog post you’ll find out more about what has happened, who this is relevant to, and what to do if you’re impacted by these pension changes along with the complex tax considerations that could accompany them.
What is a final salary pension scheme?
A final salary pension scheme, also known as ‘defined benefit‘, is calculated by multiplying how long you’ve been a member for the scheme by your final salary. This guarantees you an income for the rest of your life based on your final salary.
What is a career average earnings pension scheme?
This way of calculating how much pension you receive is based on your salary over the entirety of your career. For each year that you work, you build up 1/57th of your pensionable earnings in that year. Your pension is added together each year to build up your total career average retirement benefits. The running total can be re-assessed to also account for inflation or earnings growth.
The issue in this case is that the career average method can often provide lower pay-outs compared to the final salary schemes.
What happens if the McCloud remedy applies to you?
You’re likely to be impacted by the McCloud remedy if you’re an active pension member, a deferred member, already taking your pension benefits, and you’re:
- A member of an impacted public service pension scheme before 1 April 2012
- A member of a public service pension scheme during the remedy period, 1 April 2015 – 31 March 2022
- You’ve not had a disqualification period, namely a timeframe greater than 5 years when you were not paying into a public pension scheme from 1 April 2012 – 31 March 2015
Of note, the remedy also applies to deceased members.
What you need to do
The exact rules will likely depend on the scheme you were a member of at the time. It’s therefore worth revisiting and investigating this on the relevant pension scheme’s website. For those impacted by the changes, you’ll be asked which of the final salary scheme, or career average earnings pension scheme benefits you wish to receive for your membership during the remedy period.
You need to make a decision or you run the risk of the pension scheme administrator deciding this for you. The option you take could impact the amount you receive given it’s likely to be subject to the pension annual allowance, and lifetime allowance, provisions that were in place during the tax years 2015/16 through to 2022/23. For reference we’ve listed these below.
| Tax year | Pension annual allowance | Pension lifetime allowance |
| 2015/16 | £80,000 | £1,250,000 |
| 2016/17 | £40,000 | £1,000,000 |
| 2017/18 | £40,000 | £1,000,000 |
| 2018/19 | £40,000 | £1,030,000 |
| 2019/20 | £40,000 | £1,055,000 |
| 2020/21 | £40,000 | £1,073,100 |
| 2021/22 | £40,000 | £1,073,100 |
Given the above and the potential tax complexities arising from the McCloud remedy, we would recommend you contact a financial advisor on the best course of action with regards to which pension scheme option to choose and the likely potential impact on your tax exposure.
How Wellers can help you
- We’ve helped guide clients through the process and the implications of their updated pension savings statements that they received from their respective pension bodies
- We undertook work for our clients based on new figures provided by the pension body in question, providing them with peace of mind as to their tax position by ensuring they were fully compliant with all tax liabilities due from the 2010/11 tax year to date
- We have provided amended tax returns where required, filed at HMRC, providing clients with confidence as to how much tax they really owe
- Where clients overpaid tax in the past, we liaised on their behalf with HMRC and NHS pensions, ensuring their records were updated and any outstanding sums were retrieved
- Our work has delivered greater certainty for clients by providing them with up-to-date carried forward pension figures to then be used in the 2023/24 tax year
The content of this post was created on 17/01/2025.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
